Subscription Watch: To reserve you spot, click here. Emails will go out shortly (probably next Tuesday) to those of you who've reserved a discount rate spot. The email will explain how to pay for your subscription and obtain your user name and password. As a reminder, this site goes private September 1 and I would recommend obtaining a PayPal account to help ensure a seamless transition. A limited and as of yet to be determined amount of material will be posted on a publicly accessible page with a link to the subscriptions tab. If you have any questions please contact me at zmanalpha@gmail.com.

If you missed the weekend wrap click here. It contains all the news you can use regarding last week's commodity and index numbers (would you believe energy stocks were up on the week while oil fell 5% and RBOB retreated another 4%?). Also, comments on the CFTC and the breakout for natural gas prices ... a must!

Nigeria Watch: Rebels released a kidnapped oil worker for medical treatment but he died. MEND and other gang activity appears to be increasing again.

Hugo Watch: A PDVSA oil rig exploded on Friday according to Reuters. Hugo is trying to increase production by using the army to operate rigs. Guns and oil rigs don't mix.

Ahmad Watch: Ahmed fires Iran's oil minister Kazem Yaziri-Hamaneh. Reuters sources speculated that Ahmadinenejad is trying to increase his control over Iran's oil interests which will probably translate into rasher statements from the country regarding its use of oil as a weapon as well as on the price of oil being too low. I've often note Iran's ability to turn on a dime from dove to hawk. Getting ready for more consitent hawk in their oil talk.

Natural Gas Surges. Gas is making a push towards $7 (up another $0.12 this morning to $6.95) on a combination of heat and increased tropical activity. Shorts have got to be getting concerned in their crowded little theater.

Heat Wave Watch: Cooling degree days last week soared to 91. The Climate Prediction Center's early read calls for CDDs of 88 this week but looking at the forecasts for many of the more gas-centric regions it appears that even high gas demand for cooling load is in the near term cards.

Goldman bailing out GEO fund for $3. Said losses significant there and in the Alpha fund.

IOC ELK2 well good; stock at $40, up $7. It probably sees a little profit taking later this morning but then closes at an all time high. Mulling taking a little after the open in the Sept 45 calls but want to see what the options looks like 10 minutes after the bell.

That thing in the Atlantic looks impressive, plus it has plenty of time to grow. I’ve picked up some MDR, for offshore platforms and infrastructure, much cheaper than others FLR, SGR, and also better margins, they also seem to have got a good Katrina bounce as well, good 2Q results, building a cash mountain, plus 10% off peak.

Still looking at some gas plays, that net short position looks very inviting, CRK has run up quite a bit today. Do you know when the results of the DVN horizontal test will be out?

Very much considering taking the small loss on my NFX August 50 calls. Still have the Septembers but it’s getting a little late and the Augusts are roughly a double on the bid side today.

I always have to remind myself that the only one who cares what you paid for an option, stock, future, house, car, boat etc is you. The market certainly doesn’t. So trying to get your money back is simply bad logic.

IOC opened up $7, fell to up $2 and change, now marching higher again. It could easily close on it HOD. Probably worth a trade but the options are pretty pricey here so you’ve got buy right. I’m looking at the September 40s and 45s now.

Sorry, I still disagree. You can’t rely on the net short position. Its historic and subject to manipulation–ie reporting of hedges. Just ask (former) Enron traders about that game.

The ‘weather’ has been bullishly ‘marketed’ to the world by the funds that are shorting. We all know the effect that one single trader (Brian Hunter) had on the market.

Further, there is absolutely no conceivable weather event that can put us into any kind of ‘shortage’ situation this winter. It would take more than Rita and Katrina, two powerful direct hits, to even get us close such a concern.

And on the demand side: we all know there has been no growth in demand for nat gas for the past 10 years of rampant economic expansion. If anything, the demand risk is for a fall.

This is all fear. My call is that $1.10 (18%) fear premium in one week is a bit overdone. Not saying it can’t continue, just that the reason for the rapid rise needs some more consideration.

El D – I’m not saying $1.10 is overdone, but the pendulum often swings past overdone as we all know. Full winter storage hasn’t been a question for 2 months now. That’s not a driver of price right now. If you look at the short position, forget net for moment, the short position is off the chart. Looks like Everest. Fear will drive them to cover and that cover is what I’ve been looking for. So far they haven’t panicked yet.

I’m not sure what you’re disagreeing with. It is hot outside. That’s part of what’s taking gas up. There is a strong wave, about to be named Dean headed across the Ocean. That plays a part too.

z–a large short could always buy direct from a producer and basically swap out of their position. Keep in mind, el didnt say it, but in times of extreme turmoil, the exchange memebrs can always change the rules for covering, del’y etc…

I’m disagreeing, in general, with the calls for natural gas prices, short-term or long-term. For the same reasons that Global Alphs is imploding as we speak: Global Alpha’s (and, apparently, natural gas traders’) perceptions/models were based on rather recent (past 2 yrs) of price relationships. Things were so rosy, no one can even conceive of natural gas trading below $5. Yet the long-term fundamentals say that is precisely where we’re headed. (add in the fact that at least one rogue trader was responsible for driving the prices to record territory in the first place, further warping our perceptions).

Recall this spring: nat gas prices will go higher because of a fall in canadian exports, blah, blah, blah

There were calls for a doubling of natural gas from the $8 level! at least those calls are more tame now…

El D – I understand what you’re saying and Nicky’s point is of course true.

This spring and most of summer gas was fall as the YoY storage deficit eroded and we finally went into surplus, now it looks like we can sink back below the line again and falling into YoY deficity rather quickly with this extended heat wave relative to last years CDD comps and rising storage injections. That’s supportive of gas.

Furthermore, when you look at the fact that gas prices and absolute storage levels don’t correlate and haven’t for a long time, it tells you that high gas prices, relative to historic levels and summer levels, can and do occur even with record storage.

Imports from Canada didn’t fall nearly as much as people expected though but the evidence is mounting that they will.

$5 gas simply doesn’t work for a lot of the recent growth onshore. Anyone older than Mitchel/Devon to the Barnett can tell you $5 gas is either marginal or doesn’t work for them. Further, that growth is dependent on continuous drilling programs due to high first year decline rates. You have flush production that is likely down by 20% by the end of the first month, and half by the end of year 1. To grow they have to drill and the E&Ps have been doing that. And the prices paid for land marched right on up with the soaring activity levels. So you either drill or you don’t or you slow your pace and when you slow Tx production (among others) comes down and then you realize that the $2-$3 gas prices of yore are just that. of yore.

I’ll try one last way: a bet that weather drives prices higher is implicitly a bet that there is a near-term supply risk. Nat gas doesn’t go up because of weather, it goes up because of the risk of the impact of the weather.

Also, I hear you on ‘some’ of the marginal cost argument, but betting in that direction is implicitly a bet against technology/investment. Marginal cost is not ‘fixed’, and in a true capitalist system, it never rises for any meaningful period of time, especially for commodities, maybe not always true for specialized products like cancer treatment drugs.

El – here is a fact to consider when discussing supply and demand of Nat Gas. We have an abundance of supply right now for one reason and one reason only: high prices are driving a lot of drilling for a lot of very expensive gas. If prices were $4 and had never risen above $4, you would find that our supply would be much much lower. The rigs running in many of the “hot” plays right now would be shut down at $4 gas as the wells they are drilling just aren’t economic. Then as that supply went down we would have to rely on LNG imports ot meet the demands. LNG competes on a global market and I really don’t think we want to compete with Japan for our NG needs as they drive the price up. When Europe has a “normal” weather pattern, their drive for LNG goes up as well. As weird as it may seem, the supply/demand situation for North American nat gas is still pretty tight. And it is auto compensating. If prices drop, rigs get shut down, production gets shut in and LNG imports aren’t as attractive due to higher prices elsewhere. As the supply goes down, the price goes up, the rigs increase, the expensive wells go back on production and LNG imports become attractive again as our prices compete with other worldwide markets. Then, the whole cycle will repeat itself until something major changes. The Alaskan gas pipeline could be one of those “major” events. However, the politicians and their ilk have seen to it that that project is still a good 8-10 years away. The Canadian MacKenzie Delta project is closer to realty (maybe 5-8 years??) but that gas will help replace the dwindling canadian supply and will be scooped up by the oil sands projects.

I just focus on the big picture: our commodity markets are not as precariously perched as some would have you believe (21st century bulls). Even 2% changes in supply (or demand) take years to evolve. That’s kind of the definition of a commodity. Many of these market participants would have you believe that these changes occur in days, weeks, or even hours. They often accomplish this by focusing on one side of the equation at a time. 10 years ago it was a demand story–power plants. That never panned out, so now its a supply story.

Oil, copper, etc, are demand (China) stories now. If that doesn’t work, they will be supply stories (George, the earth called, its running out of rocks….).

Common theme in all these is the ‘fear’ that they ‘may’ be true. That gets you right to the source, the financial terrorists (hedge funds), who like physical terrorist, thrive by detecting and exploiting fear, not by actually inflicting meaningful damage.

El D, re:comment 46,I don’t buy that. I think traders going to jail fixed the false reporting to the government problem. We still get a lot of BSing about unofficial things like expected gas injections/withdrawals but I think anything that has to be reported to the government (stockpiles, short positions) is pretty clean.

Thanks Cody but no. I’m posted on enough sites as it is right now between Forex and SeekingAlpha. No, I’m moving my site to a new host. Should look the same to all of you except that it should be faster and a lot more reliable…which won’t be hard.

DrT: If I short 10,000 nat gas on NYMEX and simultaneously purchase 10,000 nat gas in physical market and stick it in storage, NYMEX open interest drops by 10,000. Nothing illegal, just an illustration of what the NYMEX number does and does not reflect.

Traders certainly know the limitations of numbers that the market relies upon, and they use those to their advantage without breaking laws because there are no laws that cover that activity. Ame with the round-trip trades of Enron-era, none of those traders went to jail for roundtripping.

Absolutely brilliant discussion re nat gas – all the comments are great food for thought and all have merit. What I love about this board is how everyone is able to discuss stuff without it getting personal and anyone flying off the handle. This way we all learn so much or at least I am.

For sure nat gas is one of the hardest things to trade as the illiquidity in the market makes the moves so extreme and often very overdone.

Even so it still throws up a clear Elliott wave count (or two!). Support is at 6820 and 6650.

El D – just looking at your comments re other commodities do you trade metals and if so do you have an opinion on them right now?

Need to calm down? Just take a few shots of liquidity and call me in the morning. Panic selling averted as central banks around the globe pumped billions and billions of dollars of liquidity in the market place to try and stop a worldwide sub-prime inspired market meltdown. That sound you heard last week was the sound of credit going crunch. It went from almost anybody would give you a loan for just about anything to the fear that even the most worthy will come away empty handed with no loan at all. So central banks are prepared to inject more and more money into the system until all our problems go away or at least until they are swept under the rug.

Oil prices bounced off the lows and came back as the stock market began to recover. Battered funds that fled from risk may start to creep back into the market especially those with limited sub-prime exposure. Some big hedge funds have taken significant losses as their computers spitting out signals have basically spit up a lot of losses. The funds that actually had less exposure to sub-prime may be primed to make a killing on undervalued venues. Oil for example will look cheap to buyers if the world’s stock-market show signs of life and demand expectations looking out over the next year remain unchanged.

But how much control do the funds have over the price of oil. Can oil rally even if the funds don’t come back? Well believe it or not it can. Of course if the outlook for oil demand remains unchanged then the funds will be driven back to the complex.

The stock market and the perception of the health of the economy for the moment will overshadow the seasonal and other fundamentals regarding the oil. In fact in this emotional environment oil may exceed a price level on the upside that it might not have been able to achieve without this sub-prime crisis. Of course the same is true on the down side if it looks like things start to melt-down again.

This should present good day trade opportunities. Call me at 800-935-6487 for the latest updates in this fast moving market and to open your account.

We are far from being out of the woods and it may take some time to learn just how bad things are. But what we do know is that no matter how bad things are it will take a while for it to show up in the energy demand numbers. Look for a 3 million barrel draw down on crude as the industry continues to draw on inventory. Look for gasoline to be up 1 million barrels and distillates up 1.5 MB. Look for runs to be up 0.5%.

The Lundberg Survey is out and is showing what most drivers already knew and that was that retail gas prices have fallen in the last two weeks. The Midwest got a big 10 cent drop as the refinery in Coffeyville Kansas and good old BP in Whiting Indiana came back on line. Retail gas prices have fallen 41 cents from the all time high set on May 18.

Buy September crude at 7080 – stop 6970.

Stopped on short September RBOB from apprx 19400 at apprx 19550. Buy September RBOB at 19500 – stop 19350.

The huge run up in 2005 pre- and post-Katrina was somewhat attributable to the ‘momentum frenzy’ in the market, momentum players, hedge funds, commodity funds, leveraged bets.

We know for a fact that those types of players are on their heels right now, unsure of near-term credit costs and availability.

Therefore, a similar ‘momentum frenzy’ when a hurricane strikes is less likely this year than in either of the past two years.

While I’m certain that hurricanes will hit this year as they have every year in history, we are not getting conclusive evidence that the price reaction may not be the same because the market participants’ behavior is changing.

I look for excess froth, so Copper is the play there, its just less liquid than energy.

If a large wave of liquidity caused the price appreciation of these assets, they will all depreciate when credit (or fear of it) tightens.

My problem with Global Alpha quants (and generally, TA, no offense intended) is that they look at past price movements, come up with an ‘acceptable’ explanation for them, then assume those explanations will work in the future. Problem is that there is more than one way to explain price movements. If your assumption there is wrong, you will end up wrong in the future. My contention is that the run up in these assets has nothing to do with supply/demand and everything to do with too much cheap money. When the cheap money goes away, all that’s left is fundamentals.

Ironically, although I often find myself on the opposite side of the ‘price movement’ in the market, not the same as being opposite the ‘market’.

TROPICAL DEPRESSION FOUR FORMED NEAR 12.0N 31.6W AT 13/1500 UTC
MOVING WEST 18 KT. THE MINIMUM CENTRAL PRESSURE WAS 1005 MB.
THE MAXIMUM SUSTAINED WIND SPEEDS WERE 30 KT WITH GUSTS TO
40 KT. PLEASE REFER TO THE LATEST NHC FORECAST/ADVISORY UNDER
AWIPS/WMO HEADERS MIATCMAT4/WTNT24 KNHC AND THE PUBLIC ADVISORY
UNDER MIATCPAT4/WTNT34 KNHC FOR MORE DETAILS. NUMEROUS STRONG
SHOWERS AND THUNDERSTORMS FROM 11N TO 12N BETWEEN 33W AND 35W.
ISOLATED MODERATE SHOWERS AND THUNDERSTORMS ARE FROM 8N TO 10N
BETWEEN 30W AND 34W.

A 1011 MB SURFACE LOW PRESSURE CENTER FORMED AT 13/1500 UTC
NEAR 22N86.5W IN THE YUCATAN CHANNEL. UPPER LEVEL WINDS ARE
BECOMING MORE FAVORABLE FOR DEVELOPMENT OF THIS SYSTEM…AND
IT IS POSSIBLE THAT A TROPICAL DEPRESSION MAY FORM LATER TODAY
OR TOMORROW AS THE LOW MOVES TO THE WEST-NORTHWEST AT 10 TO
15 MPH. RESIDENTS IN THE WESTERN GULF OF MEXICO SHOULD MONITOR
THE PROGRESS OF THIS SYSTEM. AN AIR FORCE RESERVE RECONNAISSANCE
PLANE IS SCHEDULED TO INVESTIGATE THIS SYSTEM TOMORROW IF
NECESSARY. THIS LOW CENTER FORMED ALONG A TROPICAL WAVE ALONG
86W/87W SOUTH OF 26N. ISOLATED TO WIDELY SCATTERED MODERATE
SHOWERS AND POSSIBLE THUNDERSTORMS ARE SOUTH OF 27N BETWEEN
82W AND 88W. UPPER LEVEL DIFFLUENT WIND FLOW HAS BEEN CREATED
IN THE WESTERN CARIBBEAN SEA DUE TO THE CYCLONIC FLOW AROUND
THE CENTRAL GULF OF MEXICO MIDDLE TO UPPER LEVEL CYCLONIC
CIRCULATION CENTER…AND THE NORTHEAST-TO-SOUTHWEST ORIENTED
CARIBBEAN SEA MIDDLE TO UPPER LEVEL TROUGH. ISOLATED TO WIDELY
SCATTERED MODERATE SHOWERS AND POSSIBLE THUNDERSTORMS ALSO ARE
NORTH OF 14N WEST OF 78W. THE SCATTERED MODERATE TO ISOLATED
STRONG SHOWERS AND THUNDERSTORMS SOUTH OF 12N BETWEEN 78W AND
79W ARE PROBABLY MORE RELATED TO THE MIDDLE TO UPPER LEVEL
TROUGH THAT STRETCHES FROM THE NORTHEASTERN CARIBBEAN SEA
TO THE SOUTHWESTERN CARIBBEAN SEA.

Stephen – As far as I’m concerned the NGas traders are an emotional group. They move on a rumor, etc. What I concentrate on is IF a Hurricane gets into the GOMEX, what will it do. My main concern is the platforms. I’ll post a map soon of the platform locations. Anybody remember Thunder horse, BP’s Billion dollar floater?http://www.flickr.com/photos/xjbei/25649287/

Cody – It means “Tis da season”. NHC is starting to watch these closely. Everything is starting to crank up. Watch 91L. Could hit TX. 91L/40L could become Dean, and then Erin. Could be either or both. Water is bathtub temp. By the way, 40L looks like Hugo track.

Hear ya. They move on the smallest things. Some production gets shut in when anything gets near as the companies pull men off but real damage takes real wind in the central and western gulf. Nothing over Florida way but a bunch of undrilled Shell leases.

I used to plot those platforms on a big map and plot out the platform by platform oil and gas production from the MMS database back when I had a day job. Of course, that was before the dept of the interior decided to mess over the American Indian and a judge locked up the database for all but the most high level data access. You can see it in the EIA’s data which for a time stopped breaking out even GOMEX total production.

My point is, damage will be hard to see unless companies point out specific platforms and amounts…some do, some don’t. The MMS will say what they think shuts in are but it’s pretty loose. What you can do is plot the storms and see if they’re Cat 3 or great when they pass over the thickest platform country.

Zman gets it. Companies spend huge amounts of $ in the GOMEX. If a platform gets run over by a Cat 3/4/5, game over. If this happens then we see supply drop off. Companies don’t want to report. What is scary is IF a Cane hits Houston. Big refiners down there.
Here is the link for the platforms.http://www.gomr.mms.gov/homepg/lsesale/Visual1.pdf

NOTE TO THE GROUP: MAKE CERTAIN THAT YOU DO NOT POST THINGS HERE FROM SUBSCRIBER SITES. THANKS. I’m not going to get into what is and is not a copyright violation but DO NOT post anything from a site with restricted access. Thanks.

Given the perception of the lackadaisical response to Katrina and Rita, what IF Dept of Energy announces it is releasing strategic reserves well before the first storm approaches the first platform in the GOM?

Just as the Fed has learned from past credit supply crises, so to maybe the DOE has learned from past gas supply crises.

IF there is nothing more than a temporary disruption to supply, who cares? That’s the purpose of the strategic reserve, it was used after Katrina, just too late to calm the market.

El – After Katrina and Rita, the refiners was what disrupted the markets. They were down. The US released from the Strategic reserve, but the US could not refine it. What saved us was an massive injection of distillates from Europe.
Now, if a Cane hits the platforms, we watch what was hit, whether it is Ngas or Oil, then play it accordingly. What is intersting was after Rita, Oil/Ngas stocks all went down. The crowd left.

Another difference from 2005, the economy is perceived to be more fragile now. Fallout from credit concerns, etc. Can’t withstand a big hit on energy prices today as it could in 2005. More reasons for feds to be proactive this time and quell the fears before the ‘fears’ put us into a recession…